AAPL is now shortable

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Buried within the recent quarterly report from AT&T is a subtle hint at what could haunt Apple going forward.

Not more than a couple short months ago I recommended to investors that they sell Apple. That call was early, I did not anticipate the euphoria that overwhelmed the stock for the past couple of months, but the premise for my recommendation has not changed and the subtle hints embedded in AT&T's
T, +0.09%
earnings report help to reveal the pressures I see at Apple
AAPL, +0.42%
going forward.

First, although I recommended that investors sell Apple too early, no one lost any money, but if you sold you did miss the euphoric spike. The question on everyone's mind now is if that euphoria was warranted. In my opinion it was not, but investors who were looking for a quick buck on the tail end of that market rally couldn't find a better place to put their money. Yes, Apple also has excellent products, a good track record, and every money manager wants its sizzle in his portfolio, at least they did until recently.

Underlying problems at Apple is a competitive environment that has caught up to it. Products from Samsung, Nokia
NOK, +0.19%
and Motorola are now direct competitors with the iPhone for example, where a few short years ago they were well behind the curve. In addition, mobile operating systems like Android from Google
GOOG, +0.57%
are actually dominating the mobile market.

Without a doubt, Apple led the way, and they deserve the reward of being first to market with these innovations, but technology catches up fast, and unless Apple continues to innovate at the same pace it did before, it will not stand out from the crowd on a technological basis for long. In fact, my argument is that competing technologies are in some ways already surpassing where Apple is today.

The competitive landscape only comes into play when demand equations are considered, so this wasn't there before. For example, a carrier like a AT&T, Verizon
VZ, +1.24%
or Sprint
S, +0.66%
would gladly promote a product that they knew drew customers in the door, regardless of who makes that product or what they charge for it, and recently that product has been dominated by Apple, the iPhone, and the iPad, but that can change. These products have worked to gain significant market share for companies like AT&T who had the sole rights at the beginning. They added significant market share, and had a temporary monopoly on the demand for Apple's products as a result.

Obviously, as those initial contracts expired and Apple's products began to be sold across other carriers, other carriers experienced spikes in new user sign ups as well. However, eventually that euphoria fades too. Initially there may be a jolt to new subscribers and an increase in revenue directly associated with that, but eventually, and especially if everyone offers the same products, the rate of new subscriber growth based on AAPLs existing products is cannibalistic between the carriers.

Obviously, carriers should offer Apple's products to their customers, but if Apples products no longer directly influence new subscriber growth like they did before, as is the case with AT&T now, eventually the margins come back into focus. For example, if subscriber growth is realized by selling a product that squeezes margins, a company might look the other way and rationalize that new subscribers are immediately more important than tighter margins, which has been the case recently.

However, once the new subscriber growth begins to flat line, margins become very important again, in fact at AT&T margins are actually starting to expand because fewer existing subscribers are converting to the iPhone, and carriers will take notice of this. Obviously there are other issues with AT&T, including the natural relocation of subscribers to companies like Verizon and Sprint now that they carry Apple products as well, but eventually the rate of new subscriber growth will dissipate at those companies too. Then, just like at AT&T, margins will start to play a bigger role.

Unless Apple continues to drive new subscriber growth to these carriers eventually those carriers will stop promoting Apple products as they do now. Already today when you walk into a wireless carrier the Apple products are tucked away far in the corner. Competing products are front and center, with large banners, for all customers to see. These carriers are promoting upgrades to competing products because the margins are much better than with Apple products.

Arguably, if the competitive landscape had not caught up with Apple the margin issue would not be nearly as important. However, the competition has caught up, maybe even surpassed, and unless Apple takes definitive action to excel ahead of the curve again I do not believe that the company will continue to be what we have known it to be for years.

Within the recent quarterly report from AT&T we find signs that margin actually expands when fewer Apple products are sold, and if subscriber growth flat lines as everyone knows it eventually will at each of these carriers, the products they promote will naturally be the products that offer them the best margin, so long as the technology is pretty much the same.

As an investor, that is the 64 million dollar question after all. Is AAPL innovative enough now to warrant an investment at these levels? What happens if the market does not embrace one of their new products in the future? It is only a matter of time in my opinion, and I believe that short positions from near $600 will return more than what we missed by selling too early a couple short months ago.

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